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When it comes to difficult conversations for advisors, client health ranks alongside mortality as one of the most personal and uncomfortable topics to broach. But as with most things in life, the difficult conversations are often the most important and rewarding.
The industry tends to talk in general terms about the need for clients to plan for living to 95 or even 100 and save or spend accordingly.
To put it plainly, the 50% of the U.S. population with chronic conditions will in general not live as long as healthy individuals and will spend more each year to cover health care expenses when working and in retirement. That said, healthy retirees will, on average, require significantly more savings to cover health care expenses because of their longer lifespans. These costs should not be dismissed as an insignificant line-item in the planning process. They are projected to account for as much as a third of future retirement budgets.
Although it has significant implications for retirement planning, health often isn't factored into these discussions.
One argument we hear against focusing on a client's health during the planning process is that life expectancy is unpredictable. This is ironic because in financial services we use historical market data to forecast future performance. Advisors plan on equities rising annually at around 7% to 8% after expenses over the long-term, although we know this can vary considerably over the short-term.
The same principle applies to life expectancy. Current actuarial data projects that a healthy 45-year-old male will live to an average age of 87. He may not live as long or he may live longer, but that doesn't mean he shouldn't plan for his average longevity.
Health care costs are also predictable over time — even if individual medical events are not. Individual expenses, including premiums and out-of-pocket costs, have historically risen faster than the U.S. inflation rate, growing on average between 5% and 6% each year. Actuarial forecasts project health care inflation will continue on this path into the future.
If we can agree that longevity and future medical expenses are important to retirement planning, we need to factor in health and chronic conditions.
